GDP UPDATE
October 2010
McIlvaine Company
TABLE OF CONTENTS
INDUSTRY ANALYSIS
The latest projection by a panel from the National Association of Business Economics (NABE) is for the economy to remain sluggish for the time being. The NABE panelists trimmed their projections on economic growth - expecting activity to remain sub-par through year-end. Real gross domestic product (GDP) will accelerate gradually during 2011, but remain moderate for the whole of next year.
"This summer's slowdown has exposed the economy's sensitivity to wealth losses, the unwinding of debt, and the reductions in economic stimulus," said NABE President-elect Richard Wobbekind, associate dean of the Leeds School of Business at the University of Colorado-Boulder. "Confidence in the expansion's durability is intact, but recent economic weakness has prompted many panelists to scale back expectations for the year ahead."
Highlights
While most forecasters attribute the recent rise in household saving to "fundamentals," especially losses in household wealth, one in five believe an attitudinal shift toward greater thrift has been the key driver behind increased saving.
Brazil's GDP will grow by 7.5% in 2010, according to the World Economic Outlook report released by International Monetary Fund (IMF).
The forecast is more optimistic than the one made in July, of 7.1%. It is also more positive than the estimate released by Brazil's Central Bank, which put the growth rate for 2010 at 7.3%.
According to the report, the financial market is also optimistic, which expects Brazil to grow by 7.55% this year.
In the second quarter of 2010, Brazil's GDP was up 1.2% from the first quarter and 8.8% from the same period of 2009. In the first half of the year, the country's GDP was up 8.9% year on year.
According to the IMF, Brazil and other Latin American countries need to deal with the increasing inflow of U.S. dollars, which could lead to the overheating of their economies. The IMF also said that Brazil had experienced "gradual increases in inflation pressure" in the past months, and recommended fiscal tightening measures to address risks of currency overvaluation. The IMF further predicted that Latin America would grow by 5.7% this year, and the world economy 4.8%.
The Chilean Finance Ministry expects gross domestic product to expand 5.1% on the year in 2010 and 6.1% in 2011, according to a document the minister presented in Congress recently.
The estimate is on the lower end of the central bank's outlook of a GDP increase of 5.0% to 5.5%.
Growth this year, which follows a GDP contraction of 1.5% on the year last year, "will be fueled by domestic demand," according to the 250-page "state of the nation's finances" that Finance Minister Felipe Larrain handed to a joint session of the budget commissions of both the congressional lower and upper houses.
Larrain, in the document, expressed concern over the relative strength of the country's currency in relation to the U.S. dollar.
The peso has been trading at two-year highs against the dollar, which cuts into the competitiveness of the country's exports. Chile is highly dependent on its exports as it's the world's leading producer of several metals and a top agricultural exporter as well.
"The strengthening of our currency generates complications for the agricultural and industrial sectors," he said, although he noted it alleviates inflationary pressures.
The minister also said that given global economic conditions, capital is flowing into emerging market economies, "which makes the peso's strengthening inevitable."
Panama will have Latin America’s highest economic growth the next five years, according to a Latin Business Chronicle analysis of new forecasts from the International Monetary Fund. Close behind are the Dominican Republic and Peru. Meanwhile, Venezuela will see the lowest growth in the five-year period 2011-15.
All in all, Latin America should grow an average of 4.0% during that time. That compares with 2.7% in the United States, 2.0% in the European Union and 3.8% in Central and Eastern Europe. However, it does lag the world average of 4.5%, which is pushed up by significant growth in Asia, Africa and the Middle East.
Nomura Holdings Inc. cut its economic growth forecast for South Korea for this year to 5.9% from 6%, citing weaker exports and construction investment.
Nomura expects the Korean economy to expand 3.5% in 2011, less than the previous forecast of 4%, Kwon Young Sun, senior economist based in Hong Kong, said in a report. The won is likely to gain to 1,075 to the dollar at year end, he said.
“Even though CPI inflation is now above the mid-point of the BOK’s target band (3.0%), we are changing our rate call to reflect our GDP forecast downgrades and the policy bias toward growth, especially given our forecast of KRW appreciation,” Kwon said in the report.
The Bank of Korea left its benchmark interest rate at 2.25% in September and August as policy makers weighed inflation risks against slower global growth. No rate move is expected until the second half of 2011 as a stronger won, coupled with a slump in the local housing market, could derail growth in Asia’s fourth-largest economy, Nomura’s Kwon said.
Taiwan’s gross domestic product will expand by 9.3% and 4.4% in 2010 and 2011, respectively, according to the International Monetary Fund. In an earlier forecast this July the IMF had predicted that Taiwan’s GDP would grow 7.7% in 2010, and 4.3% in 2011.
The rapid recovery of the Newly Industrialized Asian Economies (NIEs)—Hong Kong, Singapore, South Korea and Taiwan—is driven by a rebounding inventory cycle, strong domestic activity and regional demand for exports, according to the IMF report titled World Economic Outlook.
“Asia entered the global crisis on a strong footing and is continuing to lead the global recovery,” the report said. “In most parts of the region, resilience in domestic demand—thanks in part to proactive policy stimulus—has offset the drag from net exports.”
As a result, Asian economies should grow on average by 7.9% and 6.7% in 2010 and 2011, respectively, the report read.
Within the region, the IMF sees the NIEs as growing by 7.8% this year. Singapore, whose GDP is expected to grow by 15.0% in 2010, will be the leader of the pack, followed by Taiwan at 9.3%, South Korea at 6.1% and Hong Kong at 6.0%.
Economic growth for the major five members of the Association of Southeast Asian Nations is forecast at 6.6%.
The report further indicated that, from a regional perspective, mainland China is serving as a linchpin for global trade and its increasingly wide trade network is benefitting numerous economies, especially commodity exporters.
In terms of the global economy, the IMF now predicts a growth of 4.8% for 2010 and 4.2% for 2011. In its July report the IMF put the estimated growth rate for the two years at 4.6% and 4.3% respectively.
As the world will settle into a more moderate growth period in the second half of 2010 and 2011, the IMF advised emerging economies that rely heavily on demand from advanced countries to rebalance growth by boosting domestic demand. Greater flexibility in exchange rates and more active stimulus policies will also be needed if these economies are to return to pre-crisis levels of growth, the IMF said.
Nominal GDP is forecast at AZN 40.2bn ($50.2bn) in the draft budget for 2011, a growth of 3.8% on this year, according to Economic Development Minister Shahin Mustafayev.
"GDP in the non-oil sector will grow 7.2% in 2011 and 8% a year in 2012-2014," Mustafayev said.
He added that per capita GDP was forecast at $5,540 in 2011 and $7,100 in 2014. Annual average inflation will be 5% next year.
In 2011-2014 the share of the oil sector in GDP would fall from 47% to 38%.
"Industrial production in the non-oil sector is forecast at 7.3% for 2011, with chemical production forecast at 10.4%, building materials at 6%, foodstuffs at 4.8% and metallurgy at 22%, which will be achieved partly through the commissioning of a new aluminum plant in Ganja," the minister said.
Agriculture will grow 5.5% in 2011 and 3.4% a year in 2012-2014.
Growth in the service sphere will reach 7.5% in 2011 and 8.7% in the subsequent three years. By 2015 services will account for 43.7% of GDP.
"The growth in communications next year is forecast at 18.5% and in the coming three years at 17.4% a year on average," Mustafayev said.
He described the government's medium-term priorities as improvement of the investment climate, support, including financial, for small and medium-sized businesses and support for competitive production and regional development.
"At present, 211 production and social facilities are under construction in the regions, of which 57 are agricultural, 63 in the service sphere and 80 industrial," the minister said.
The chairman of the Milli Majlis, Ogtay Asadov, said that the global economic crisis had not had a serious effect on Azerbaijan's economy.
"This proves the correctness of Azerbaijan's oil strategy," the speaker claimed. He noted that the global crises had proved the stability of Azerbaijan's economy.
"This can be seen in the high economic growth rates which allow budget revenue to be expanded by 5% in 2011. Meanwhile, budget revenues from the non-oil sector will grow 8%," Asadov said.
He added that in 2011 the non-oil sector would provide up to 62% of state budget revenues, which as a whole were forecast at AZN 12.1bn ($15.1bn).
SEB bank has lifted its forecast for economic growth in Estonia, shortly after the country's central bank did the same. The institution said it now expects gross domestic product to increase by 2.3% in 2010, instead of 2.0% as previously predicted. However, it lowered its forecast for next year, while also raising the expected unemployment figures, the Baltic Course reported.
SEB bank now expects the Estonian economy to grow by 4.0% in 2011. This is one percentage point lower than its original estimate.
Estonia's central bank was a little more optimistic. It is expecting growth of 2.5% this year followed by 4.2% in 2011. These forecasts were raised from 1.0% and 4.0% respectively.
In a statement, the bank said: "The recovery of Estonian economic growth is strongly dependent on external demand.
"As most of Estonia's main trading partners have recovered from the crisis faster than expected, Estonian exports have grown more than we forecast in April."
Lithuania's economy topped the 27-member European Union with 3.2% growth in the second quarter, according to Eurostat.
The growth rate was followed by Germany, where the economy grew by 2.2% in the second quarter compared to the first. Economies of Finland, Sweden and Estonia followed with growth of 1.9%.
The report is the second Eurostat estimate of second quarter economic output in Europe. The statistical agency said the economies in the 16 nations that share the euro as currency rose by 1.9% compared to the second quarter of 2009 while for the 27-member European Union, the economy grew 2% compared to the same period a year ago.
For both the EU and the euro zone, economic output grew 1% compared to the first quarter, in line with expectations.
In the EU, three economies reported contractions in the second quarter. In Greece, the economy shrank 1.8%. Ireland's economy shrank 1.2% while Luxembourg's economy declined by 0.3%.
In France, the economy rose 0.7%. In Britain, economic output rose 1.2%. In the Netherlands, growth hit 1%; and in Spain, the economy was flat, rising 0.2 %.
The International Monetary Fund has revised upwards its forecast for Poland's economic growth in 2010 to 3.4% and 3.7% in 2011, the World Economic Outlook report states.
In the previous report published in April, IMF projected Poland's GDP growth to reach 2.7% this year and 3.2% next year. In the July report IMF's forecast for Poland stood at 3.1% and 3.5% respectively.
In European emerging markets which went through the mildest economic slowdown like Poland, the rate of growth should increase supported by the normalization of global trade and capital flow, the October edition of the World Economic Outlook reads. But in some countries like Poland and Romania planned VAT rises are likely to temporarily hike inflation.
The Bank of Portugal recently revised up its projection for Portugal's GDP growth this year to +1.2% from +0.9% expected in July but trimmed its forecast for 2011 to flat from +0.2%.
Fiscal consolidation measures taken by the government will have a contractionary impact on economic activity in the short term, the central bank said in its quarterly Economic Bulletin.
This year's improved economic prospects stem from stronger private and public consumption than expected in July. Private consumption is now seen growing by 1.8% vs. 1.3%, while public consumption is seen rising 1.5% vs. down 0.9%. This would offset weaker fixed investment and a smaller boost from foreign trade.
Next year, investment is now seen falling 3.2% vs. -1.6% expected previously. The downturn in private consumption would be slightly less pronounced at 0.8% vs. 0.9%.
The Turkish government's upgraded forecasts for economic growth of 6.8% this year and 4.5% next year are "cautious," Economics Minister Ali Babacan said, underlining Turkey's position as one of the world's fastest growing emerging markets.
Babacan said Turkey's soaring current account deficit, a persistent weak-spot for the economy in times of domestic demand-fuelled growth, was "sustainable," despite growing investor nerves that the finance gap leaves the economy dangerously exposed to external shocks.
"The growth forecasts are cautious," Babacan said, adding that the current account deficit is sustainable because "Turkey has seen these levels before...we can continue with the deficit around these levels."
Babacan, who also holds the office of Deputy Prime Minister, was speaking to reporters in Ankara to outline the details of the government's medium-term economic plan.
In that plan, Turkey's government dramatically revised up its growth expectations, underscoring the economy's rapid recovery from the financial crisis. But according to its new mid-term economic program, published in the government's official gazette, Ankara also more than doubled its estimate for the current account deficit this year.
The National Institute of Economic and Social Research downgraded to 0.5% their estimated UK GDP for the three months ending in September. The three months ending in August had an estimated 0.6% growth.
The official release's vision for the future is somewhat grim: "The National Institute interprets the term "recession" to mean a period when output is falling or receding, while "depression" is a period when output is depressed below its previous peak. Thus, unless output turns down again, the recession is over, while the period of depression is likely to continue for some time. We do not expect output to pass its peak in early 2008 until 2012."
McIlvaine Company
Northfield, IL 60093-2743
Tel: 847-784-0012; Fax: 847-784-0061
E-mail: editor@mcilvainecompany.com
Web site: www.mcilvainecompany.com